Real estate to be given own class on S&P Dow Jones Indices, MSCI

The S&P Dow Jones Indices and MSCI have given the real estate sector its own class, separating it for the first time from the rest of the financials arena.

The decision to make real estate a distinct class has come in part due to the huge success that the sector has enjoyed over the last few years, outperforming the S&P 500 – with S&P's REIT industry index jumping by 24 per cent year year since 2009, compared to the 18 per cent rise noted for the benchmark.

The new classification – under the Global Industry Classification Standard (GICS) structure – will cover all real estate investment trusts (REITs) apart from mortgage REITs, CNBC confirmed, adding that the mortgage REITs are to remain in the general financials arena. It marks the first time that an entirely new sector has been made under the GICS structure since its inception in 1999.

Experts have said that being classified as a separate entity is both a positive and a negative for the sector, positive in that it could well entice passive investors hoping to make major profits across a new market sector while also impressing current investors who were unaware of how strong the sector was. The negative impact could come due to the ongoing impression held by some that the real estate sector remains somewhat of a risky proposition thanks to the 2008 financial crisis and mortgage woes.

The overall market has been far outperformed by REITs in recent years as they are such a strong dividend play across a relatively low-yield backdrop. REITs are required to pay 90 per cent or more of taxable income each year in the form of shareholder dividends, while real estate stocks provide seven per cent earnings growth along with a three per cent or more dividend yield. It has also performed well thanks to the strong recovery it has enjoyed since the credit crunch, across not only the commercial real estate market, but also the industrial, apartment and office sectors.

Remy Briand, managing director and global head of research at MSCI, told the news source: "This is the first significant structural change to GICS sectors since its inception and reflects the position of real estate as a distinct asset class and a foundational building block of a modern portfolio, rather than an alternative. GICS was developed as a means of standardization that would keep up with the evolving investment landscape."

The change marks the ever-increasing prominence of real estate on the world stage, as David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices, confirmed when it was first publicly announced last spring. "The creation of an eleventh sector recognizes the growing importance of real estate in the world's equity markets. The decision to add a real estate sector was based on extensive comments from investors and analysts as well as in-depth analysis and discussions between S&P Dow Jones Indices and MSCI."

It remains to be seen what sort of ripples a change of this importance could bring for the sector, said Alexander Goldfarb, managing director and senior REIT analyst at Sandler O'Neill. "Unanticipated consequences are that people that are looking at the current financial index [are seeing] those returns have been enhanced by real estate. REITs will come out of financials, so the performance of the financial index can lose what had been a strong tailwind."

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